Public Bill Committee

[Mr. Peter Atkinson in the Chair]

(Except clauses 7, 8, 9, 11, 14, 16, 20 and 92)

Peter Atkinson: I welcome members of the Committee to the start of our proceedings on the Finance Bill. I have a couple of housekeeping points to make. Jackets may be removed. Will hon. Members ensure that their pagers are switched off? They will have noticed the red boxes. They may keep their Bill papers in them, but will they please return them to the cupboard after each sitting?
I remind the Committee that adequate notice should be given of the intention to table amendments. As a rule, my fellow Chairman and I do not intend to call starred amendments, including any that might be reached during an afternoon sitting of the Committee.

Stephen Timms: I beg to move,
That the Committee shall meet
(a) on Tuesdays at 10.30 a.m. and 4.30 p.m., and
(b) on Thursdays (other than Thursday 4 June) at 9.00 a.m. and 1.00 p.m.,
when the House is sitting.
Thank you, Mr. Atkinson, for your welcome. I wish to take the opportunity to say a few words. I extend a warm welcome to you and to your co-Chairman, Mr. Hood. We welcome the experience and the knowledge that you will bring to our proceedings, as well as your firmness and fairness. I am confident that you will guide us so that our deliberations are thorough and to the point. I welcome Mr. Laurence Smyth, who will be assisting the Committee. I also welcome the hon. Members for Fareham, for South-West Hertfordshire and for Hammersmith and Fulham, and other members of the Conservative party who will be supporting them, particularly those who will be serving on the Committee for the first time. We shall be spending a lot of time together during the next few weeks.
I also welcome the hon. Member for Taunton to our proceedings. I am pleased that I shall be stoutly supported throughout our debates by my hon. Friends the Exchequer Secretary and the Economic Secretary, who I am delighted to see here. I know that they will want to join me in welcoming my hon. Friends on the Labour Benches to the Committee and to express warm thanks to them in anticipation of our progress.
I wish to put on the record my thanks to the many advisers and representatives who have already given advice throughout the preparation of the Bill. We shall obviously be welcoming further contributions from them as we scrutinise it in greater depth during the next few weeks. They do a great deal of work and make an important contribution to our task. I look forward to our deliberations as we fulfil our duties in examining the Bill in Committee.

Mark Hoban: I also welcome you, Mr. Atkinson, and your co-Chairman, Mr. Hood, to the proceedings. The Financial Secretary and I are veterans of proceedings on the Finance Bill. This is my fourth Bill as a Front Bencher. I participated in proceedings in 2002 as a Back Bencher, so I know what a long haul we have in front of us. I have not quite reached the record established by the Financial Secretarys predecessor, the right hon. Member for Bristol, South (Dawn Primarolo). She dealt with 13 Finance Bills in Opposition as well as in Government, a record in longevity to which I am not entirely sure that I aspire.
Our proceedings are perhaps the less glamorous aspect of the Budget. All the excitement of Budget day is over and done with. We have moved from a Committee of the whole House to a Public Bill Committee, and the fact that our proceedings are not programmed will give all members of the Committee the chance to explore at length the provisions of the Bill. Labour Members who did not take part in the debate on the Finance Bill in the House will now have the opportunity to voice their concerns about aspects of it. I am disappointed that the hon. Members for Wolverhampton, South-West (Rob Marris) and for Coventry, North-West (Mr. Robinson), the most assiduous participants when the Bill was discussed in the Committee of the whole House, have not found favour with the usual channels to serve here, but perhaps their absence will enable other Labour Members to shine and flourish in the confines of this room.
We are about to undertake an important scrutiny process The Financial Secretary said on the Floor of the House and by letter that the Government would table amendments. It is important to get the Bill right and to approach it with the rigour and seriousness that a Bill affecting so many people requires. I am grateful, as the Financial Secretary is, to the support of House advisers, who give up their time voluntarily to help inform us and to make sure that the scrutiny process is effective. I am grateful to my hon. Friends for joining us in Committee and I am sure that we shall do battle with the Treasury Bench and Labour MPs in a generous and well-spirited way.

Question put and agreed to.

Ordered,
That the order in which proceedings are taken shall be: Clauses 1 to 5; Schedule 1; Clause 6; Schedules 2 and 3; Clauses 10, 12, and 13; Schedule 4; Clauses 15 and 17; Schedule 5; Clauses 18, 19 and 21 to 23; Schedule 6; Clauses 24 to 26; Schedule 7; Clause 27; Schedule 8; Clause 28; Schedule 9; Clause 29; Schedule 10; Clause 30; Schedule 11; Clause 31; Schedule 12; Clause 32; Schedule 13; Clauses 33 and 34; Schedule 14; Clause 35; Schedule 15; Clause 36; Schedule 16; Clause 37; Schedule 17; Clause 38; Schedule 18; Clauses 39 and 40; Schedule 19; Clause 41; Schedule 20; Clauses 42 and 43; Schedule 21; Clause 44; Schedule 22; Clauses 45 and 46; Schedule 23; Clauses 47 and 48; Schedule 24; Clause 49; Schedule 25; Clause 50; Schedule 26; Clause 51; Schedule 27; Clauses 52 and 53; Schedule 28; Clauses 54 to 58; Schedule 29; Clauses 59 to 61; Schedule 30; Clause 62; Schedule 31; Clause 63; Schedule 32; Clause 64; Schedule 33; Clause 65; Schedule 34; Clauses 66 to 71; Schedule 35; Clauses 72 to 75; Schedule 36; Clauses 76 to 82; Schedule 37; Clause 83; Schedule 38; Clause 84; Schedule 39; Clause 85; Schedule 40; Clause 86; Schedule 41; Clause 87; Schedule 42; Clause 88; Schedule 43; Clause 89; Schedule 44; Clause 90; Schedule 45; Clause 91; Schedule 46; Clauses 93 and 94; Schedule 47; Clause 95; Schedule 48; Clause 96; Schedule 49; Clause 97; Schedule 50; Clause 98; Schedule 51; Clause 99; Schedule 52; Clause 100; Schedule 53; Clause 101; Schedule 54; Clauses 102 to 105; Schedule 55; Clause106; Schedule 56; Clauses 107 and 108; Schedule 57; Clause 109; Schedule 58; Clauses 110 to 117; Schedule 59; Clause 118; Schedule 60; Clauses 119 to 122; Schedule 61; Clauses 123 and 124; new Clauses; new Schedules; Clauses 125 and 126.(Mr. Timms.)

Clause 1

Charges and main rates for 2009-10

Question proposed, That the clause stand part of the Bill.

Stephen Timms: We announced in the pre-Budget report and confirmed in the Budget that the basic rate of tax would remain at 20 per cent. and the higher rate of tax at 40 per cent. for the current tax year. As part of a package of measures, we reduced the basic rate to 20 per cent. from 2008-09, which is the lowest rate for more than 75 years, with the 40 per cent. higher rate continuing to apply to higher-rate taxpayers. Taken with the other changes made to personal tax, basic-rate taxpayers are £145 a year better off in April 2009 compared with April 2008. In 2009-10, 21 million households will gain, on average, by about £6 a week compared with April last year.
The tax rates for this year will continue to preserve the two-rate structure for the vast majority of taxpayers. In the pre-Budget report we set out support to low and middle-income familiesto help during the global economic downturnand the fiscal consolidation measures that we would need in the medium term. All of those changes together mean that no one with an income less than £100,000 will see an income tax rise in 2010-11, when the increases take effect. The measures for 2010-11 announced in the Budget will focus only on the highest 2 per cent. of incomes, those above £100,000 a yearthe opportunity to debate those matters will come later.

David Gauke: First, may I say what a great pleasure it is to serve under your chairmanship in this years Finance Bill Committee, Mr. Atkinson.
Clause 1 sets out the main rates for income tax, as the Financial Secretary stated. It would be fair to say that the issue of rates is not as prominent this year as it has been. As the Minister said, the Government have preserved the two-tier structure for income tax. The two-tier structure was announced in the Budget of 2007 by the then Chancellor, the current Prime Minister, and is one that will last, it would appear, for two years, and for two years only. The reason why the issue of rates was so prominent last yearI was one of those lucky enough to serve on the Finance Bill Committeewas that the two-tier structure that we see in the clause was established, with a basic rate of 20 per cent. and a higher rate of 40 per cent. That was the first year of the structure, because before that we had the 10p rate. Next year it appears that we shall have an additional 50p rate.
Turning to how we got to where we are with the clause, it was the consequence of the Budget announcement of 2007. In his very last sentence, the then Chancellor announced that he was reducing the basic rate of income tax from 22p to 20p. Earlier in his speech he had announced the abolition of the 10p rate, but he had not made it clear that there would beeven taking into account the reduction to 20pa substantial number of losers.
The Minister has referred to the structure of income tax and the fact that there would be no losers in 2010-2011. But when the new structure was announced in 2007, it quickly became apparent that 5.3 million households would lose out as a consequence of the abolition of the 10p rate. That number was quickly produced by the Institute for Fiscal Studies soon after that Budget. I served on the Treasury Committee and I remember that that number was broadly confirmed by Treasury officials. When the same figure was put to the then Chancellor the day after, he denied that figure and saidfor various technical reasons that I do not intend to go intothat the figure was incorrect. By the time we got to our proceedings last year, it was clear that the figure of 5.3 million households losing out was correct. By that point, Ministers had confirmed the figure in written answers, after it was pursued by the right hon. Member for Birkenhead (Mr. Field), although he pointed out that getting those answers was somewhat difficult and it was not possible to obtain answers about how many individuals would lose out.
I have stated the figures now because the Government have their structure of 20p and 40p in clause 1, but the issue of the losers from the abolition of the 10p rate has not gone away. It is true that during our proceedings last year the Government introduced a compensation package that cost £2.7 billion and raised personal allowances. One could be cynical and say that it was during the Crewe and Nantwich by-election last year. If that was the reason, the package was singularly ineffective. None the less, it confirmed that the increase in personal allowances, which was described as temporary this time last year, would not be withdrawn in the PBR last autumn.
There is still uncertainty as to whether there are a substantial number of losers, and I draw the Committees attention to EDM 1279, which has been tabled by the right hon. Member for Birkenhead, who suggests that up to 3.8 million individual taxpayers continue to lose out as a consequence of the new structure. The EDM has been signed by 60 Memberspredominantly Labour Members. I could be wrong, but I do not believe that any members of the Committee have signed it, and I suspect that Labour members of the Committee are relieved that they did not sign it because, had they done so, they might not have had the honour of being selected for this Committee. It was EDM 1279, but I fear it is too late now.
The EDM calls for compensation, and we appreciate the fiscal mess that the Government are in. If there is to be a compensation package, the question of affordability will have to be considered. Can the Minister confirm whether that number of up to 3.8 million taxpayers is correct? If it is not, what is the correct number? The question is about the number of individual taxpayers. That is an important point because the Government have always given the number of losers in households. It would still be helpful if the Minister could provide the households number to the Committee, but the point made in a number of instances by the right hon. Member for Birkenhead is that a household may consist of two earners. The example that he often gives is that the man may well benefit from the reduction of 2p in the basic rate of income tax, bringing us to the 20p that we have today, but the woman may be earning less and she may well be losing out as a consequence of the abolition of the 10p rate. Collectively as a household they may well be benefiting, but she as an individual may well be losing. That is why it is interesting to pursue the question of individuals as well as households. That information would therefore be very helpful and it remains astonishing that a Labour Prime Minister, in an attempt to pull a political stunt, was prepared to double income tax for low earners.
The other reason why the issue of rates, which we are debating in clause 1, is perhaps not as prominent as it was last year is that those of us who served last year will recall that the hon. Member for Taunton, on behalf of the Liberal Democrats, tabled a motion to reduce the rate of income tax from 20p to 16p. That, I understand, is no longer the Liberal Democrat position, although we look forward to the hon. Member for Taunton setting out his reasons in due course. I suspect that we will address this when we look at the issue of personal allowances, but I wonder whether the arguments used this time last year on 20p or 16p proved to be so persuasive that the Liberal Democrats changed their course. No doubt we will find out.
The other point I make, with regard to the main rates, is that I do not wish to touch on the various issues relating to the 50p rate which the Government intend to introduce next year. That is for later clauses and my hon. Friend the Member for Hammersmith and Fulham will be setting out our views on those issues. However, I note that in 1997, 2001 and 2005 the Labour party manifestos on which the Government were elected promised not to raise the basic and higher rates of income tax. That, of course, is a pledge that is going to be brokento the extent that a manifesto pledge in those areas is worth anything from this Government. One can question whether it is even worth asking that question, but I am interested to know from the Financial Secretary whether his party intends to provide a pledge not to raise the standard rate of income tax. Clearly, the Labour party intends to breach its manifesto pledge on the higher rate of income tax, but will it repeat its pledge on the basic rate of income tax and, if it does, will he explain why people should take that in any way seriously?
Save for those brief remarks, Mr. Atkinson, we would be grateful to hear the Ministers answer, but we are proposing no amendments to clause 1.

Jeremy Browne: Mr. Atkinson, this is my first opportunity to echo the comments made by others in saying how much I am looking forward to serving under your chairmanship, and that of Mr. Hood, during the course of our deliberations.
I have only a few, brief comments to make on what is, after all, a very short clause. However, it is worth putting the clause in the context just given by the hon. Member for South-West Hertfordshire. Of course, the discussion that we had a year ago about this clause focused primarily on the 5 million-plus people in the UK who were losing income as a result of the Government doubling the 10p rate of income tax for those on particularly low earnings. Of course, the Governments attempts to try and rectify that situation and convince Labour Back Benchers, in particular, and people right across the country that they had not intended to inflict such financial penalties on people on low earnings, meant that there was little opportunity to scrutinise quite serious changes to our system of income tax. The Government did not introduce those proposals in the normal way through a Budget and a Finance Bill so the opportunities for scrutiny were compromised. That is regrettable. Approximately a million people are still net losers as a result of the changes that the Government introduced, even with the compensation that was meant to rectify that issue.
The hon. Member for South-West Hertfordshire reminded us that, at this stage in our deliberations last year, I tabled an amendment to reduce the 20p rate to 16p. It remains Liberal Democrat policy to try to reduce the income tax burden on those on very low earnings. Our preference now is to try to do that through thresholds, rather than the rate itself. But the total amount that we wish to redirect to low earners remains the same. More detail will obviously be made available, possibly in next years Finance Bill. We live in times of rapid political change so who knows what will happen?
The other two points that I wish to make are slightly more central to the clause. First, I find it extraordinary that the first clause of this rather substantial piece of legislation contains a word that is misleading. It states:
the higher rate is 40%.
It is not the higher rate as anyone understands it in the wider world. As I understand it, compensation and tax credits make marginal rates for those on low incomes variable. Then there is a 20 per cent. rate and the 40 per cent. ratethis is without national insurance. There was then going to be a 45 per cent. rate and there are a whole range of tapers which mean that at some point people are paying marginal rates on their income of 61 per cent. Then it drops off and there is a 50p rate. By no reckoning is 40p the higher rate. It is roughly in the middle. I query whether the Bill is accurate in the impression that it seeks to create when even on line 8 people are invited to believe that 40 per cent. is the highest rate of income tax one can pay, unless one says that it is the higher rather than the highest rate, but I would regard that as splitting hairs.
My final point is about simplicity. In his final Budget as Chancellor, the Prime Minister gave as a reason for having two rates the fact that everyone would know where they stood. It was nice and clear cut. There is merit in greater simplicity, as we have discussed before. Indeed, I am told that Tolleys Tax Guide has increased from 4,555 pages in 1997 to 9,841 pages in 2006. So it has doubled in length in a decade. That is an unreasonably large amount of guidance and legislation to get through in order to understand the tax liabilities in this country. Therefore, greater simplicity is valued by nearly everybody except, perhaps, accountants who benefit from a lack of simplicity.
The Government made a merit of having a more simple structure of income tax, but have then complicated it at every turn to try to target assistance or, indeed, penalties at particular groups in society. We now have a higher rate that is not the higher rate, a system that is meant to be simple that is not simple and large numbers of people on low incomes who have been heavily penalised as a result of the Governments changes. So it is not a happy start to a long period of reflection and deliberation on other clauses that are probably even less attractive to the general public than this first one.

Stephen Timms: I note that the content of clause 1 is not very controversial so I will keep my remarks brief. The hon. Member for South-West Hertfordshire asked me about the early-day motion and the reference to 3.8 million people. I am aware of that figure, but I cannot confirm it as I have not seen the analysis and I am not sure of the basis that underpins it. However, the number of households that have lost out as a result of the changes has been reduced from over 5 millionwhich was the initial announcement, as the hon. Gentleman saidto 600,000 this year, and 500,000 by 2011-12. It will therefore have been reduced by 90 per cent. by that time. The losses that we are talking about are less than £1 a week on average this year. We have made a great deal of progress in addressing the concerns that were raised in the Committee and elsewhere a year ago.

David Gauke: I note that the Minister is not able to confirm the figure of 3.8 million individuals who have lost out, and again he has given a household number. Is that because the Treasury has simply not done any analysis on how many individuals will lose out, and if not, why not?

Stephen Timms: It is because the available data are on a household basis. I think that there was some discussion about that last year. I do not know of a sound basis on which to do the individual calculation. The figure of 3.8 million sounds large, and I would be surprised if it was that big, but as I said, I have not seen the analysis and I cannot comment on whether it is a plausible figure. I am confident that the number of households that have lost out will be 600,000 this year and the extent of the losses is extremely modest.
The hon. Member for South-West Hertfordshire raised a point about the changes regarding the new 50p rate, as did the hon. Member for Taunton who also commented on the restriction of allowances. We will come on to those matters shortly so I will not say any more about them at this stage, other than to observe that it is right for us to take action to respond to the biggest economic crisis that the world has seen in 70 years. That requires some fiscal consolidation and we have set out what I will argue is a fair way of taking the necessary action. That is for a later debate, and I commend the clause to the Committee.

Question put and agreed to.

Clause 1 ordered to stand part of the Bill.

Clause 2

Basic rate limit for 2009-10

David Gauke: I beg to move amendment 1, in clause 2, page 2, line 2, at end add
(3) The amount specified in Section 12 of ITA 2007 shall similarly be £37,400..
I should say at the beginning that those of us who were in the House on Thursday will be aware that business closed earlier than anticipated. As a consequence, there was something of a hurry to table the amendments. I make no claim that amendment 1 is technically the finest amendment ever placed before the Committee. It is a rather hurried attemptwhich I considered to be the lesser of two evilsto submit a flawed but pertinent amendment that would enable the Committee to debate one of the significant issues that face many people in the country, namely the impact on savers of the reduction in interest rates that has occurred in recent months.
We must look at what we can do within the taxation system to help savers at this difficult time. Consequently, amendment 1, which raises the threshold for income tax on savings, is a quick and simple way to bring this matter to the Committee. My partys policy is to go further than amendment 1, but it is consistent with what the amendment is about, which is to help savers by reducing the burden of income tax on their savings. I hope that that clarification is helpful to the Committee, Mr. Atkinson, before I turn to some of the things that we can do to help savers in the context of clause 2.

Stephen Timms: I do not entirely understand what the hon. Gentleman is saying. How is the proposal different from the one we debated in the Chamber to remove tax altogether? In a sense it is rather hurried. Is his partys policy now that tax should be reduced to 10p or to nil?

David Gauke: That is a perfectly fair question. The policy remains the sameto reduce tax to nil. The amendment arrived literally as the Minister was sitting down on the Adjournment debateI do not want to conceal that from the Committee. Our policy remains the same, but it is only fair to the Committee that I explain that. If the Minister has been forced to examine in great detail the arguments about extending the basic rate, as I fear he may have done, I should perhaps apologise, but it was a needs must amendmentsomething that was to hand.
The Minister will be aware of our policy for 2009-10 to abolish tax on savings income for all basic rate taxpayers. Applying the 10p rate could be described as a halfway house. The amendment is designed to probe the matter.

Jeremy Browne: A simple question: what are the cost implications of passing amendment 1?

David Gauke: The hon. Gentleman asks a fair question. We would expect amendment 1, in conjunction with new clause 2, which raises the personal allowance for pensioners, to cost £4.1 billion. We could have found the money by reducing the growth rate in public spending for 2009-10. When we produced the policy, the Government were proposing a 3.4 per cent. real-terms increase in the growth rate. We propose restraint, so that increase should be 2.6 per cent. To put it another way, the Government were going to increase public spending from £620 billion to £650 billion and we suggested that, of that £30 billion increase, £5 billion could be used to help savers.
I suspect there is a degree of sympathy across the Committee for a group of people who have, most of us would say, done the right thing by trying to put money aside and provide some independence for themselves, but who have found their income substantially reduced because of falling interest rates. We estimate that savers have lost approximately £22 billion of annual interest income as a result of rate cuts. Let me be clear: we think it was necessary to reduce interest rateswe are not criticising the Monetary Policy Committee of the Bank of Englandbut people have lost out as a consequence.

Stephen Timms: The hon. Gentleman is making a fair point about the impact of what has happened on savers. However, I want to press him a little further on how he proposes to finance the £4.1 billion cost. We have had debates in the Chamber about £5 billion of saving cuts this year, although his party has not given us any details about where they would have made those cuts. From next year, as he knows, we are introducing £5 billion-worth of efficiency savings. Is his party proposing another £5 billion on top of those efficiency savings to pay for this measure, which presumably would be continued into next year?

David Gauke: What we have is a policy for this yeara policy to find additional funds for savers this year and to make savings this year. There is still an opportunity for the Government to reconsider and to pursue the policy that we advocate. Assuming that they do not do so, next year, if we are in government, we will be in the position next year of having to assess the public finances to identify the savings needed to reduce public spending.
As the Minister has rightly said, the Government believe that it is perfectly possible to find efficiency savings of £5 billion, although that is not altogether surprising in a budget of £650 billion. We note that the Government do not seem to think that there will be any great difficulty in making those savings next year. We wonder why it cannot be done this year.

Jeremy Browne: The hon. Gentleman said a moment ago that what had stimulated the Conservatives to bring forward this policy was a big cut in base interest rates and the impact that that cut had had on savers. Obviously, one sympathises with savers who are in that position. However, should we infer from his comments that the policy would no longer apply if interest rates rose to high levels again? Is it, in effect, like the Conservative fair fuel stabiliser, so that if we were to have very high interest rates, a penal tax would be brought in to punish savers, so that some sort of equilibrium was achieved? That appears to be the logical conclusion to draw from his description of the policy.

David Gauke: The hon. Member for Taunton sometimes allows his own version of logic to carry him away. There is a short-term and a long-term argument for savings. The short-term argument is particularly acute at the moment, because, as I am sure he is finding in his own constituency, there are people who have not spent rashly or not built up huge debtsquite the reversewho are still being hit hard, perhaps because of the recklessness of others. That is the short-term argument and that is why we are pursuing this policy.
However, I am grateful for the hon. Gentlemans intervention, because it brings me on to some of the longer-term issues and in particular why we need to do more to encourage saving. That is a fundamental point about how we rebalance the economy.
We have not been saving as much as we used to. I know that there has been a recovery in the savings ratio in the last few months, as tends to be the case during a recession. The ratio was down at about 1.7 or 1.8 per cent and it is now up at 4.8 per cent. Nevertheless, the fact is that society as a whole has been borrowing too much and saving too little. Our level of household debt has become very considerablegreater than our GDP. Relative to the size of our economy, we have the highest household debt in the G7. Figures from Alliance & Leicester show that 13.5 million Britons did not save in 2008, which is 28 per cent. of the population. Research for MoneyExpert states that a third of adults face financial disaster within two months of losing their jobs, because we do not save enough as a society.
That has several impacts, one of which is a lack of resilience if there is a downturn in the economy, which is what we have unfortunately been experiencing, leaving individuals in a difficult position. The burden on the state also increases if individuals do not have their own savings to protect them from economic and personal difficulties.

Mark Todd: The hon. Gentleman is making a powerful argument for the long-term merits of policy towards savers, but is now the time, in macro-economic terms, to incentivise savings? That is certainly not the normal understanding of a correct response to a recession.

David Gauke: We think that a tax cut would be helpful; the hon. Gentleman and I have debated such matters in the past. My party believes that the principal response do a downturn such as this should be monetary policy. As I stated earlier, we have no criticism of the reduction in interest rates that has occurred; we need a monetary response. Indeed, we have argued for a long time that more could be done to get credit flowing around the economy. Furthermore, the likes of Christina Roma, who is one of President Obamas advisers, argue that the multiplier effect of a tax cut, which is, after all, what we are advocating, is as significant as public spending.
I understand the hon. Gentlemans argument, but one of the difficulties surrounding the whole issue is that there never seems to be a good time to encourage saving. The Government have tended to enjoy the tax revenues from a boom and from a rise in stamp duty owing to an asset bubble and, as a consequence, they have not done enough to encourage saving.

Jeremy Browne: I was going to make the same point as the hon. Member for South Derbyshire and speak of my concern about incentivising saving during a recession. However, I am interested in the response given by the hon. Member for South-West Hertfordshire to that point, because he appears to argue for a fiscal stimulus: he says that this is a good opportunity to cut taxes and put more money in peoples pockets. My understanding of the respective positions of the Government and the Conservative party is that the Government want an unfunded tax cut, but will only give money to people when they spend it, whereas the Conservatives want an unfunded tax cut, but will only give money to people when they save it. Is that the current position?

David Gauke: The point I am making is that the response to a recession should be monetary. The concern expressed by the hon. Member for South Derbyshire is that that would take resources away from public spending and direct them towards people who save. If one is worried about a Keynesian fiscal stimulus, there are those who still defend a tax cut rather than public spending and argue that it would have precisely the same effect. I return to my essential position that the response has to be monetary. Indeed, the hon. Member for Twickenham has made the point in the Chamber on at least one occasionI quoted in from the Committee of the whole House last weekthat, despite all the arguments, all parties essentially agree that the response should be monetary. There might, however, be a disagreement on fiscal measures on the periphery.

Peter Bone: I wonder whether we are getting to the crux of the difference between the Government and the Opposition. The Government believe in more and more public spending, whereas the Conservative party believes in controlling public spending and giving tax cuts and more money to people. Does my hon. Friend also agree that it is extraordinary that he is being grilled so much more than the Minister? It is almost as though we are in power already.

David Gauke: I am grateful for my hon. Friends observation. Taking his second point first, I am happy to be grilled and welcome such tension about Conservative party policies, as I am sure he does, and he is quite welcome to intervene on such points.
The Governments position on public spending is somewhat schizophrenic. They state that now, in 2009, more public spending is necessary and that the Conservatives are all about cuts and being beastly generally, despite the fact that the Government have already slowed their public spending plans and have proposals for future public spendingnoticeably after the general electionthat are really quite tight and that will involve real-term cuts in departmental expenditure. Yes, there is a difference between our party and the Government: we believe that public spending restraint should start as soon as possible, whereas they are delaying those painful decisions.
There is a feeling, perhaps across the board and the only question is one of timing, that we need to do more to restrain public spending and to help savers. The argument we tend to hear from the Government and their supporters is that that might be right, but now is not the right time. However, the financial difficulties facing savers and the crisis within the balance of our economy are such that we do not have time to waste.
I return to one of the reasons why encouraging saving is important and would be helpful. In recent years we have seen a boom and an explosion of debt and asset prices, not only in the UK, although we have a particular problem, but in much of the west. As a consequence, we face significant global imbalances. In 1997, gross foreign current liabilities were £1,100 billion; by 2008, that figure had quadrupled to £4,400 billiona sign of the expansion of banking liabilities as a consequence of the savings being created in countries such as China.
To give another example, in 2001 the customer funding gapa definition used by the Bank of England to express the difference between what banks have lent and borrowed from British households, businesses and institutionswas nil. By June 2008 it was £740 billion, as a consequence of banks funding themselves 40 per cent through wholesale sources. I mention that because there is an imbalance within the global economy. In countries such as China, huge savings were being made and the Chinese economy was clearly expanding rapidly, but because the culture of saving in China and in parts of the developing world is so strong, those savings have essentially come to the UK. We have had an imbalance whereby the west has been consuming while the east has been saving. That creates a degree of instability, which I think is a factor in a lot of the difficulties that western economies have had in the past couple of years.
Since August 2007, those wholesale sources of finance have dried up, and that caused the credit crunch. However, we can also look to the fact that over a long period we in the west largely stopped saving. I shall not exaggerate the impact of our policy and say that the tax cuts that we propose for 2009-10 will effect a transformation. It is a wider problem and there are other factors influencing the fact that we have not been saving enough. However, we could signal the direction that we are going in.
I note that the BBCs Robert Peston refers to the new capitalism, one element of which is a stronger sense of saving in the UK and other western economies. With interest rates coming down to historically very low levels, the signal to those who may be thinking of saving is, Is it really worth putting money aside for a rainy day? When things get difficult, you do not get anything for your savings anyway. That is the immediate difficulty we face.
Although flawed, I hope that amendment 1 has enabled the Committee to probe what we can do to help savers and whether we can reduce income tax. I shall give a couple of examples that relate, not to increasing the pensioner allowance, but to abolishing tax at basic rate for savers. A 60-year-old retired couple, with a total pension income of £12,000, could be £400 a year better off. A 40-year-old single mother, working part-time and earning £100,000, with savings producing £800, could be £160 a year better off. Our proposal is affordable, it would help innocent victims of the downturn and it would signal, in the longer term, that we value savings. We are going to have to save more as a society and we, as a Government, should do what we can to help savers.

John Howell: I start by thanking my hon. Friend for arguing for savers. I will look at savers who are pensioners. I have been concerned about the Governments apparent dismissiveness of the impact on pensioners of the reduction in savings interest. In its utterances, the Department for Work and Pensions has been minimising how the impact will fall on pensioners and, particularly, whether it will increase the number of pensioners likely to fall below the margins that one would normally expect. That is partly due to the statistical approach that it uses.
The figures for 2006-07, which are probably the most complete, show that something like 72 per cent. of pensioners were in receipt of income from investments. That is a huge number. The average income was more than £50 per week, which is a significant amount of money. By using the median rather than the average, we can bring that down to £7 and, therefore, dismiss it as insignificant, but even then, if an individual was relying on a notice-based deposit account, their income would have fallen from £7 to £2 a week, as a result of the interest rate cuts. Will the Minister say whether the Treasury is as dismissive of the effect of interest rates on pensioners as the Department for Work and Pensions seems to be?

Stephen Timms: The amendment would extend the 10 per cent. starting rate for savings income from a band of £2,440 to a band of £37,400. I will respond to the amendment, although I will also comment on what we have now clarified as Conservative policy.
Responding to the points raised by the hon. Member for Henley, it is certainly the case that, although low interest rates have greatly helped families with mortgages, for example, they have reduced the returns for savers. The Government are not at all dismissive of that. I can understand why the amendment has been tabled and I agree that savers need help in difficult times, but I do not agree with the approach set out in the amendment.
The hon. Member for South-West Hertfordshire has helpfully clarified that this is a one-year proposal and the Conservative party would not be committed to it for future years. However, because of the way that income is ordered when an individuals tax liability is calculated, with tax on savings income being calculated after income from other sources, such as employment, self-employment and pensions has been taxed, the effect of the amendment would be to make the 10 per cent. savings rate disproportionately valuable to savers with higher incomes. That would cost the Exchequer about £250 million.
The concern about disproportionality is even greater in relation to the proposal to abolish tax on savingswe have clarified that that is the Conservatives policy. When that proposal was first announced in January, there was some confusion among Conservative Front Benchers about how it would affect higher rate taxpayers. The shadow Chief Secretary said that it would not help higher rate taxpayers, while the shadow Chancellor said that it would. I believe that the shadow Chancellor was right. Indeed, the example that the hon. Member for South-West Hertfordshire just gavea rather puzzling example about a single mother working part time, earning £100,000 a year

David Gauke: £10,000.

Stephen Timms: Ah, but the hon. Gentleman said £100,000. It makes more sense to refer to someone earning £10,000. Nevertheless, on the basis of his proposal, there would be a benefit for higher rate taxpayers as well. The amendment does not go that far, but it would cut the basic rate on savings to 10 per cent. and would suffer from a similar drawback of being disproportionately valuable to savers with higher incomes.
There are more effective ways of targeting supportparticularly for savers who are likely to be facing the greatest difficulties, such as pensioners. That is why the Budget announced three measures to support older people in particular. First, from October this year, we will raise the ISA limits for those aged 50 or over. More than 18 million people hold ISAs, so that will provide support to many savers through the tax system. That is one particularly successful measure of a raft of measures that the Government have taken to increase saving in the economy.

David Gauke: I have two brief points to make on ISAs. One is on the rather complicated system of different limits depending on ones age. Can the right hon. Gentleman explain why he has done that? Secondly, how much does he think a person can benefit from the reduced tax as a consequence of the increase in the ISA threshold? Given current interest rates, does he agree that the most it can be is about £30 or £40 a year?

Stephen Timms: I have not done that calculation, but the figure that the hon. Gentleman suggests may well be right. Of course, his argument a few minutes ago was about the need to increase the incentives to save. Raising the ISA limit in such a way will be a significant incentive.
Secondly, HMRC is launching a tax back campaign, which will contact 2.7 million pension credit recipients. The campaign will encourage pensioner savers to reclaim any tax that they have overpaid on savings and, where possible, register their account to receive income from their savings tax free in the future. Again, that will help pensioners with savings.
Thirdly, and perhaps most significant, the Government will increase the capital disregard in pension credit and housing and council tax benefit for pensioners to £10,000 from this November. That will significantly increase the generosity of pension credit for those who have savings. More than half a million low-income pensioner households will benefit by £4 a week on average, those on the lowest incomes by up to £8 a week.

Mark Todd: Those measures are certainly welcome. Will the Minister expand a little on the assumed interest rate that is taken into account in calculating the entitlement for housing benefit, when savings that are vestigial that lie within that limit are taken into account? That issue concerns many pensioners whom I represent.

Stephen Timms: I am aware of the matter, and it has been raised from time to time. It is not accurate to describe that as an assumed interest rate. The assumption that is made is that if someone had a significant capital sumin the future we are talking about over £10,000it would be perfectly appropriate for them to use some of that, as well as the interest earned, to meet their expenditure. It would not be right to ignore entirely the benefit of that sum in meeting to expenses.

Peter Bone: Is the Minister introducing a new concept? I never realised before that the disregard was more than a calculation of the assumed interest. Instead, it says to a pensioner, You are too rich. You must use some of your savings. Is that the new policy?

Stephen Timms: No, it is simply a recognition of the fact that people with savings are able to draw on them to meet their needsthat is, after all, the purpose of savings. That has always been the case, and the basis of the pension credit capital disregard.
That package is much more effective in supporting savers at risk in the current difficulties than the approach suggested in the amendment. In 2011-12, the Government package will cost £190 million a yearnot much less than the amendment suggests, and the package will be much better targeted at those who most need the help.
Mr. Atkinson, I have a few remarks on the clause stand part. Clause 2 will raise the basic rate limit from last years £34,800 to £37,400 this year, a rise of £800 over indexation. Taken together with the £130 above-indexation increase to the personal allowance made by the next clause, it means that nobody will pay a higher-rate tax on incomes below £43,875. It is an increase in the higher-rate threshold, which will support middle-income families during the global downturn. It also takes the higher-rate threshold for 2009-10 to the same level as the upper earnings and profits limits for national insurance, the point at which somebody stops paying the main 11 per cent. rate of national insurance and starts paying the additional 1 per cent. rate.
In 2011-12 the threshold at which someone starts to pay national insurance will be aligned with the tax-free personal allowance. The levels at which individuals start and stop paying the main rates of tax and of national insurance will be aligned for the first timea simplification that will be widely welcomed.
One feature of the broad-based fiscal consolidation announced in the pre-Budget report last year included increasing the rates of national insurance by 0.5 per cent. Alignment of the national insurance primary threshold and the income tax personal allowance will mean that those with incomes of less than £20,000 and subject to the full standard rate of national insurance will gain more than they would lose from the rate rise at that point. Looking at all the changes since April 2008, no one with an income of less than £40,000 will be worse off.
The Budget changes build on the pre-Budget report, securing further consolidation targeting the 2 per cent. of individuals with the highest incomesthose most able to contributewhile protecting those with lower incomes. I invite the Committee to support clause 2.

David Gauke: I shall respond principally to the Ministers remarks on amendment 1 and our policy on savers. Let me be clearit has been clear throughoutthat our policy to benefit savers was to benefit only basic rate taxpayers and pensioners on modest incomes. That has been the position all the way through, and I hope that that is clear, notwithstanding the remarks of the Minister.
On the package referred to by the Minister, I do not intend to spend a great deal of time on the issue of ISAs, Mr. AtkinsonI am sure that you would warn me off from doing so. To be fair, the Minister has a point about the increase in the ISA limits being a symbolic message of encouragement to saving. However, I note that he did not disagree with my numbersin practice, it is likely to be around £30 or £40 per person in the current climate.

Stephen Timms: May I press the hon. Gentleman on his earlier point, that the position of his party is clear on whether higher rate taxpayers will benefit from the measure or not? His point was the point made by the shadow Chief Secretary. However, the shadow Chancellor told the BBCs Money Box programme on 10 January:
Of course thats entirely truethat if your entire income is savings and youre a higher rate taxpayer, then you benefit like other people do from the fact that the basic rate goes to zeroand we never said otherwise. Indeed Ive made that point as well.
So, the shadow Chancellor is telling us that higher rate taxpayers will benefit from his proposal.

David Gauke: I have the Q and A that was circulated internally. We have made it clear that the policy is targeted at basic rate taxpayers. We shall continue to have a tapering system. Indeed, in that interview on Money Box, some of the criticism that my hon. Friend the shadow Chancellor was getting was that the policy would not benefit some pensioners who were earning somewhat more. The policy is clear.
The tax back campaign raises two important points, one of which is how our policy would help the lower earnerspensioners who do not receive enough from their savings to pay the basic rate of income tax. There are a large number of such people, who do not always get their tax back and do not always go through the process to reclaim. That is not to say that we do not welcome the Governments initiative to encourage more people to get their tax backindeed, I raised the point with the Minister this time last year, asking what the Government were doing about it, and the Low Incomes Tax Reform Group has campaigned on the issue for a long time. None the less, a reasonably substantial number of peoplein particular, a reasonably substantial number of pensionersare not getting their tax back in the way that they should and I suspect that that will continue to be the case. Our policy would help those people.

Peter Bone: Will the Minister give waysorry, the shadow Minister? Surely, the situation is this; if those people were not paying any tax under the Conservative policy, we would not have the Revenue spending all the money on a campaign that must be costing a considerable amount of taxpayers money.

David Gauke: Indeed. My hon. Friend is right that our policy would be a lot simpler to administer and that there would not be a need to campaign for pensioners to reclaim the tax that they had overpaid. So he is absolutely right, and his suggestion is clearly helpful.
I note the comments made by the Minister with regard to the national insurance contribution rises. I do not intend to get into a lengthy debate on that issue. I noted that the Minister chose his words very carefully when he discussed who would be gaining and who would not be losing. However, the fact remains that the NI contribution increase that is designed to come into effect immediately after the election will make those people who are earning £20,000 worse off.
I also note the Ministers comments about the alignment between the upper earnings limit of NI and a higher rate of income tax, which was part of the package announced in 2007. I would be grateful for clarificationthis is a genuine questionabout a point he made that slightly confused me, which was about the lower earnings limit. As I recall, the original proposal in 2007 was that the point at which one started paying NI contributions and the point at which one started paying income tax was going to be the same. However, that got rather confused by the compensation package for the 10p rate and the increase in the personal allowance. However, there was not an equivalent increase for the point at which one starts paying NI contributions, so that we lost that very simple two-tier system. From what the Minister has saidmaybe I have missed a pointthe implication is that by 2011 we will be back to that system.
Mr. Timmsindicated assent.

David Gauke: The Minister is nodding in assent, but I would still be grateful for a little clarification on that issue. Subject to receiving a response to that point, however, I will be seeking leave to withdraw amendment 1.

Peter Atkinson: Order. Before the amendment is withdrawn, does the Minister want to respond to that point?

Stephen Timms: I am happy to do so. I can confirm that, as we announced in the pre-Budget report, we will align the national insurance primary threshold to the level of the income personal tax allowance, with effect from April 2011.
Having said that, however, I would be grateful if the hon. Gentleman explained the mechanism for achieving the effect that he has described to the Committee, which is that the abolition of income tax on the first part of peoples savings will not benefit higher rate taxpayers. For example, take someone who has earnings of, say, £30,000 and savings income of £20,000, so that their total income puts them into the higher-rate tax band. Presumably someone in that position would benefit from the zero rate that the hon. Gentlemans party proposes, so that there would be a benefit to higher-rate taxpayers, as the shadow Chancellor said on Money Box. I cannot see what mechanism there could be for avoiding the effect that the shadow Chancellor saidrightly, I thinkwould apply.
I am glad that the hon. Gentleman broadly welcomes the tax back campaign. Let me just make the point that, as we will discuss further when we consider a later clause, 62 per cent. of pensioners pay no income tax, thanks to the very substantial rises in age-related personal allowances that this Government have introduced. A much, much higher proportion of pensioners are out of tax altogether than was the case in 1997.

David Gauke: On the issue of age-based personal allowances, I will try not to stray into the next debate. The intention is that savers will benefit at basic rate only. I note that the Government were able to increase personal allowances in a way that did not benefit higher rate income tax payers. We are confident that we can find mechanisms in order to deliver our objective, which is to help basic rate payers.
I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 2 ordered to stand part of the Bill.

Clause 3

Personal allowance for 2009-10 for those aged under 65

Question proposed, That the clause stand part of the Bill.

Peter Atkinson: With this it will be convenient to discuss new clause 2Personal allowances for 2009-10 for those aged over 65
(1) For the tax year 2009-10 the amount specified in
(a) section 36 of ITA 2007, and
(b) section 257(2) of ICTA,
(personal allowance for those aged 65 to 74) is replaced with £11,490.
(2) For the tax year 2009-10 the amount specified in
(a) section 37 of ITA 2007, and
(b) section 257(3) of ICTA,
(personal allowance for those aged 75 and over) is replaced with £11,640.

Stephen Timms: The clause increases the personal allowance for those aged under 65 by £130 above indexation. Over the last year we have announced a number of changes to personal tax which focus support now on low and middle income households while consolidating the fiscal position in the medium term, targeting those who can afford to pay more while protecting those with the lowest incomes.
In May last year, we announced an in-year rise in the personal allowance worth up to £120 to all basic-rate taxpayers. Most people saw the benefit of that change from last September. In the pre-Budget report, we announced further support for families, reflecting their difficulties at the moment. We rolled forward the increase in the personal allowance, and increased it by a further £130 above inflation. For 2009-10, that means that the tax free personal allowance will increase from £6035 to £6475. The clause makes that change.
The package of measures announced in the pre-Budget report, of which clause 3 is an important element, provides support to all low and middle-income families for the current period, and will mean that some 23 million taxpayers with an income under £40,000 will be, on average, around £145 a yearnearly £3 a weekbetter off in April 2011, compared to April 2008. Changes since the Budget last year will mean that 800,000 low-income households will be completely taken out of tax. The changes brought in by the clause will also fully compensate about 90 per cent. of households who would have otherwise been paying more net tax from the removal of the 10p tax rate, as we were discussing a few minutes ago.
New clause 2 would raise the age-related allowances for those aged 65 and over by £2,000 from its current level this year. The hon. Member for South-West Hertfordshire said earlier that this was part of a package that he estimated as costing £4 billion. I think that this particular part of it would cost some £1.2 billion. I guess from what he is saying that he envisages it being a one-year only increase in the age-related allowances, with the expectation that the age-related allowance would be reduced again in the following year. That would be an unusual thing to do; changes of this kind to age-related allowances really ought to be on an enduring basis, rather than a temporary basis. It is a significant downside to what he is proposing.
Mr. Atkinson, if I am able to catch your eye at the end of this short debate, perhaps I will say some more about new clause 2, but I commend clause 3 to the Committee.

David Gauke: On clause 3, I note the increases in personal allowances. The Minister has stated that he also acknowledges that this does not succeed in compensating a number of those who have lost out as a consequence of the 10p rate being abolished. I am sure that point has been noted by his own Back Benchers.
On new clause 2, the Minister said that he could see difficulties in an increase in personal allowances being for one year only. I note that comment. As I have made clear, this policy is for this year and personal allowances would need to be looked at again next year were we in a position to control what those allowances might be and consider the appropriate approach. I was rather struck by the irony that a Minister was querying whether it was appropriate to use the personal allowance on a temporary basis to address a particular problem. Those of us who recall last years debates will know that the Government did precisely that with a temporary increase in personal allowances to address the 10p rates, which they made permanent in the PBR. Certainly the intention this time last yearit was almost to the day that the compensation package was announcedwas that it was on a temporary basis. I am not sure that the Government are on the strongest ground here.
As the Minister stated, the intention of new clause 2 is to raise the personal allowances for those over 65 and those over 75 by an additional £2,000 a year.

Mark Todd: The new clause appears to be silent on the issue of the point where the benefit of this increased allowance starts to be lost. There is a point at which this raised allowance for those over 65 deteriorates. Is that adjusted at all within the proposal?

David Gauke: The hon. Gentleman makes a fair point. It is an important technical point and one which the new clause does not fully address. We recognise that there will be a tapering system. Our policy is aimed at helping those who benefit from the basic rate. We think that these amendments help to achieve that.
I note the Ministers earlier points about the benefit of raising personal allowances and taking pensioners out of the tax system, but our proposal does not result in some of the difficulties of pensioners having to claim back taxes in certain circumstances. Clearly it helps to take pensioners out of the tax system. I do not intend to run over all the arguments about encouraging saving in order to provide resilience for individuals, to encourage independence and perhaps even to provide stability within our banking system, as I have made those points already. Equally this group has been hit hard by the fall in interest rates in recent months. This must be seen as part of the package to help savers which I addressed earlier. We believe that this is a useful policy. It will help those who have been unfairly affected by the fall in interest rates. An increase in personal allowances in this area is a simple way of redressing that.

Mark Todd: I want to explore this a little further. If this is targeted at those who have lost income from falling interest rates it will apply to any pensioner over 65 whose income may be drawn from any source. I am not quite clear about the targeting of this in relation to the hon. Gentlemans argument.

David Gauke: The hon. Gentleman is right to say that income in a number of other areas has also declined, but this measure needs to be seen as part of a wider package. Pensioners, for example, are in a more difficult position than they were a couple of years ago due to the changing economic climate. We think that the Government should pursue that matter, and to find savings in public spending now in order to provide support to pensioners would be a sensible policy.

Peter Bone: I have spoken to pensioners in my constituency whose savings income has gone down so drastically that they have had to go back to work. Would not the new clause benefit those people, as they would get an effective reduction in the income tax that they pay?

David Gauke: That is absolutely true. These are difficult times and there may also be people who have delayed retirement. I can think of constituents who are in exactly that position. Those people deserve our support, and consequently, I commend the new clause to the Committee.

Jeremy Browne: As we saw from our discussions on clause 2, it is important that Opposition parties get the details of their policies right before submitting them to the Committee. As far as I understand, the Conservative partys policy changes depending on what point on Thursday afternoon it is. Amendment 2, which I tabled, is not being discussed directly, but it is helpfully on the blue sheet that gives notice of amendments. It seeks to provide an opportunity to discuss how different income tax thresholds could benefit different interests and income groups. Unlike the Conservative proposals, this is an extremely robust and well thought through set of proposals by my party, and it will form the centrepiece of our election manifesto.

Peter Bone: I have a sense of dĂ(c)jĂ -vu. Did not the hon. Gentleman stand up at this time last year and say that his proposals were going to form the centrepiece of the Liberal Democrat manifesto? Will we have new proposals before the election for next year?

Jeremy Browne: Sadly, we have not had an election so we carry on. However, the hon. Gentleman is rightit remains our view that we should give greater assistance to people on low and middle incomes by charging them less in income tax. Last year we suggested that that might be achieved by reducing the basic rate. We are now saying that the same objective could be better achieved by raising thresholds. We propose that instead of the figure of £6,475, the personal allowance should be £10,000. That would result in a reduction for anybody earning in excess of £10,000.

Mark Todd: On a point of order, Mr. Atkinson, I am not clear which amendment we are discussing. We appear to be hearing a speech in favour of an amendment that has not been selected.

Peter Atkinson: That is not a point of order for me, but something that the hon. Member for Taunton might wish to explain.

Jeremy Browne: I am grateful to you for providing me with that opportunity, Mr. Atkinson. We feel that the clause would be better if it said £10,000 instead of £6,475, and on that basis, we do not feel able to support it. The stand part debate gives me an ideal opportunity to argue that clause 3 is not a good basis on which to legislate. I hope that the Committee will be convinced by my argument and will reject the clause. We believe that increasing the allowance to £10,000 would have a profound and beneficial impact on people on low and middle incomes. For example, it would represent an income tax cut of £705 for those earning over £10,000, and 4 million people would not pay tax altogether.
I do not wish to try your patience, Mr. Atkinson, but it would not be credible for us to make this case without convincing the Committee and the country that the sums add up and that we have lots of robust proposals for financing this radical and attractive measure.

Peter Atkinson: Order. I wish to clear some confusion in my mind. The hon. Gentleman can speak to clause 3 stand partthe entire clauseat this moment. We are not debating only the new clause; we are debating the whole thing. I was not sure whether he was clear on that.

Jeremy Browne: That is what I was hoping to do.

Peter Atkinson: At the end of this debate we will put the question whether clause 3 should stand part of the Bill. There will be no division on the new clause; if there is to be one, it will be much later in our proceedings.

Jeremy Browne: I was just seeking to make a point about the Governments proposed 2009-10 personal allowance for those aged under 65. I do not wish to incur your wrath, Mr. AtkinsonI did not want to speak at length about alternatives put forward by my party. Those will become apparent in time, and I do not wish to get too far from the matter in hand. I want to put on the record, because it is important, that attention will increasingly be paid to the question of how we can alleviate the tax burden on those on low and middle incomes. The Government have in many cases tried to do that with a complex system of tax credits. Our fear is that that leads to excessive complication; the system could be simpler. As we all know from our constituencies, there can be a sizeable administrative burden, which the Government do not always deal with very efficiently. My party is coming up with alternative proposals that we feel would be helpful.

David Gauke: I am grateful to the hon. Gentleman for giving way during his explanation of the clause and his proposals on personal allowances. It has often been said, certainly by his colleagues, that as part of a fiscal stimulus there is a need to raise taxes on the wealthy to fund tax cuts for those on low pay. Is this proposal explicitly part of a fiscal stimulus, or not? Secondly, as I understand it, when this policy was announced, it was going to be financed by abolishing tax relief on higher earners pension contributions. Now that the Government have gone some way towards that, does that leave a black hole in the hon. Gentlemans partys calculations?

Jeremy Browne: I shall not answer at great length because I do not wish to upset anybody, Mr. Atkinson. The first point is that our proposals are revenue neutral, so there is a shift in the tax burden to try to assist people on low and middle incomes. Therefore, it is not a fiscal stimulus in the sense of borrowing money to fund an overall tax cut. I think most people would accept that those on low and middle incomes tend to spend a higher proportion of their income than those on higher ones, so the effectadmittedly fairly modestmight be to increase overall spending without changing the overall tax burden. Shall I go on to the second point?

David Gauke: I hope the hon. Gentleman will forgive me for intervening while he responds to the first point, before having a chance to respond to the second. The Liberal Democrat tax policy as presented by the hon. Member for Twickenham, particularly in debates after the PBR, was that there is a need for a fiscal stimulus, but a funded one. I think the hon. Member for Taunton is acknowledging that. Applying his own logic, does this mean that when the time comes for fiscal tighteningif he believes fiscal measures are appropriatethere would be a transfer and that his party would raise taxes on the poorest and cut taxes on the wealthiest, because that would be a fiscal restraint?

Jeremy Browne: I am grateful for that intervention because I wish to share with the Committee my desire to see the tax burden reduced, if possible. I have watched both Labour and Conservative Governments increase taxes on people on low and middle incomes, and I know how much difficulty that causes. That is not a path that I would argue for going down. We are proposing a measure that would help people and households with fairly modest incomes. It is not primarily designed to try to stimulate the economy as a whole, but that would be a beneficial by-product of our policy, were the Government to adopt it. As I said, it would have a modest but nevertheless real stimulus effect because of the different spending patterns of different groups.

Peter Bone: Will the hon. Gentleman give way?

Jeremy Browne: I will, but first let me finish answering the previous intervention. It is true that one of the measures we are proposing in order to fund the increase in the personal allowancea reduction in income tax for people on low and middle incomesis to standardise tax relief on pension contributions at the basic, 20 per cent. rate. To some extent, the Government have taken a dimension of that pot of funding, but quite a small one, because Government policy still allows for pension relief at the upper rate and only cuts it off higher up the income scale.

Peter Bone: The hon. Gentleman is yet again making a powerful speech on behalf of his partycompletely opposite to the one that he made last year, which was also very powerful and persuasive. Last year, I was persuaded; it was an interesting and radical proposal. Presumably, that is why his party dropped itbecause I thought it was a good idea.
I must ask the obvious question: how much would the proposal cost? In broad terms, how much would it cost for each of the cuts or changes that would need to be made to make up for the loss?

Jeremy Browne: I am flattered by the hon. Gentlemans comments and his observation that I am able to argue persuasively in all kinds of forums. His central, flattering observation is not entirely accurate, because I was arguing this time last year that we should make our income tax system better able to assist people on low and middle incomes, and that is the argument I am making today. We can have a discourse about the best way to do that, but we think our proposals would be most effective. On the cost, I could go through all the proposals but perhaps I can refer the hon. Gentleman to my partys website, where they are given in greater detail. It is not central to clause 3, but if you wish to indulge me, Mr. Atkinson, I will happily give a seminar on the benefits of Lib Dem policy.

Peter Atkinson: indicated dissent.

Jeremy Browne: I see you are shaking your head, Mr. Atkinson. [Interruption.] The hon. Member for Rochford and Southend, East says that I do not know. I know only too wellI just do not know whether everyone else on the Committee wishes to know the same amount of detail.
The proposal is a shiftit is not tinkering with the edgeswhich is why I said it would be the central feature of our manifesto at the next general election. This is an important matter because it relates to many people who pay the basic rate of income tax, including many on the minimum wage who are nevertheless caught up in the threshold at quite a low point below their total income. So it is by no means affluent people whom we are talking about; rather, we are talking about typical households in all our constituencies that would benefit from not having the state take a proportion of their income on the one hand, while on the other coming up with complicated ways of reimbursing individuals whom it feels are unable to live on their post-tax income. We are trying to achieve a more equitable society. My party would not be comfortable with endorsing the figures in clause 3.

Stephen Timms: Some of the amendments we have been debating this morning seem to be in a shaky condition. Pensioners are often on fixed incomes, and the age-related allowance has at least been raised in line with indexation every year since 1997. In 2008-09 the age-related allowances were increased by £1,180 above inflation for those aged between 65 and 74, and by a higher amount for those aged 75 and over. We also announced that the age-related allowances for those aged 75 and over will rise to £10,000 for the 2011-12 tax year. We have set the allowances this year at £9,490 for an individual aged 65 and over and at £9,640 for someone aged 75 or over, and those increases mean that 62 per cent. of pensioners aged 65 and over will not pay tax. Those measures will lift around 800,000 people out of the tax net altogether, getting towards two thirds of pensioners being outside tax altogether, compared with a much smaller proportioncertainly less than halfin 1997.
We have made good progress in lifting pensioners out of tax altogether, but I cannot support the new clause. It would cost well over £1 billion and give no benefit at all to that group of nearly two thirds of pensioners aged 65 and over who do not pay tax. I say to the hon. Member for South-West Hertfordshire that it simply cannot be right to spend so much for no benefit at all to those on the lowest incomes. There is a balance to be struck. The hon. Member for Taunton has argued for a somewhat larger increase in age-related personal allowances, but I think that he, too, would acknowledge that the announcements we have made represent a substantial change for people aged 65 and over. It is a welcome change that will benefit a large number of pensioners.
The Government have of course made many other changes for the benefit of pensioners. Overall, as recent figures confirm, 900,000 pensioner households have been lifted out of relative poverty since 1997, and a pensioner is now no more likely to be poor than someone from any other part of the population. That is an unusual position to be in. Historically and traditionally, pensioners have always been less well off than the population as a whole. This is the first time in our history that, over an extended period, pensioners are no more likely to be poor than anyone else, and that has been the case since 2003in both the period of growth and the current downturn. That is an important achievement that the Government have secured. I do not think that the new clause would be right, and I ask the Committee to reject it and to agree that clause 3 should stand part of the Bill.

Question put, That the clause stand part of the Bill.

The Committee divided: Ayes 15, Noes 2.

Question accordingly agreed to.

Clause 3 ordered to stand part of the Bill.

Clause 4

Reduction of personal allowance for those with income exceeding £100,000

Question proposed, That the clause stand part of the Bill.

Stephen Timms: The clause legislates for the gradual removal of the personal allowance for those with incomes of more than £100,000 a year. The change will take effect from April of next year and, as part of the package of fiscal consolidation measures, the clause ensures that those with the highest 2 per cent. of incomes will no longer get twice the amount of benefit from the personal allowance that a basic rate taxpayer with an income of £10,000 would receive, for example.
The clause withdraws the personal allowance at a rate of £1 for every £2 of an individuals income above £100,000. Assuming that the personal allowance is £6,475 in 2010-11, it will mean that a taxpayer with an income of more than £112,950 would have the personal allowance fully removed. The clause affects 2 per cent. of taxpayers with the highest incomesthe 2 per cent. in the best position to contribute. The income of that relatively small group has grown by almost 90 per cent. during the past 10 years, twice as fast as for the average taxpayer. It is only right that those in that group should contribute to the fiscal consolidation that is now required. Tapering the allowance means that there is no cliff edge for those with incomes of just more than £100,000 a year. For clarity, I emphasise that no one with an income of less than £100,000 will pay more income tax under the clause. In last years pre-Budget report, it was proposed that the personal allowance was half removed above £100,000 and then fully removed above £140,000. However, the global downturn has been more severe than predicted at the time so we have brought forward the second half of the removal of the personal allowance.
For the purpose of the taper, an individuals income is their adjusted net income. That is the long-established basis for the calculation of the taper that applies to higher amounts of personal allowance for those aged 65 to 74 and those aged 75 and over, as we have just discussed. Broadly, adjusted net income is a persons income liable to income tax after taking account of pension contributions and gift aid payments. Tax due at the additional rate will be collected in the usual way through a combination of pay-as-you-earn and self-assessment. That does not apply to the vast majority of people98 per cent. of taxpayerswho will not experience any change in the way in which their tax is calculated.

Peter Bone: Does the Minister agree that the policy is a clear departure from new Labour principles and that we are now going back to the old Labour idea of taxing the rich because it is right to tax the rich, whereas new Labour was for a vibrant economy to attract people to this country?

Stephen Timms: No, it is not. The policy is consistent with the new Labour commitment to fairness in the tax system. Everyone throughout the world recognises that consolidation is required. The new Labour approach to achieving that consolidation is to make sure that those who are best in a position to afford an additional contribution should be asked to contribute more. Clause 4 ensures that those with incomes of more than £100,000 a year make a fair contribution to the consolidation that is required. It also removes an unfairness in the tax system that has been discussed over the years whereby people with very high incomes receive twice as much benefit from the personal allowance as somebody who pays tax at the basic rate. Therefore, there is a further fairness benefit.

Greg Hands: It is a pleasure to serve under your chairmanship, Mr. Atkinson, and I look forward to our deliberations in the coming weeks. This is my second Finance Bill; last year I considered it from the Back Benches. I can only assume that I did something wrong to be put on it pretty much full time from then on, but I am looking forward to it.
It is ironic that this is called clause 4I refer to the intervention by my hon. Friend the Member for Wellingborough intervention about this marking the end of new Labour. The clause allows us to examine the perverse structure of the marginal tax rates proposed by the Government. What the Government propose is, thankfully, slightly simpler than the two-stage proposal outlined in the pre-Budget report 2008, to which the Minister referred. Nevertheless, the proposals introduce considerable complexity into the income tax system and associated tax calculations.
In terms of the revenue raised, which is important to look at, the withdrawal of the personal allowance from individuals with incomes above £100,000 is estimated to raise £890 million in 2010-11, rising to £1.4 billion in 2011-12. As before, those figures combine the estimates for the 2008 PBR staged restriction of the personal allowance with the Budget 2009 announcement. The Budget report estimates that the total yield from removing the personal allowance will be £1.5 billion come 2012-13.
As the Minister says, the Government propose that, from 6 April 2010, the personal allowance for individuals with an adjusted net income of over £100,000 will be limited by £1 for every £2 over the limit. Based on 2009-10 personal allowances, that means that individuals with an adjusted net income of £112,950 or more will not benefit from the tax-free personal allowance. Meanwhile, using the 2009-10 personal allowance figure of £6,475, withdrawing the personal allowance at a rate of £1 for every £2 of income over £100,000 results in a marginal income tax rate of 60 per cent., or 61.5 per cent. with national insurance contributions, on income between £100,000 and £112,950.

Mark Todd: All those figures are based on there being no behavioural change in the individuals involved. Is the h G going to expand on the issues that that raises?

Greg Hands: I am, and I thank the hon. Gentleman for that intervention. One of the great weaknesses in the Governments case is that, as far as I can tell, there has been no study of any behavioural changes, either from this or from the change to the 50p tax rate in clause 6, which we will come to in due course.
The volume of changes in this years Budget has added considerably to the overall convolution. Phasing out these allowances, probably more than anything else, has added massive complexity to our tax system. One way of evidencing that is to look at the profusion of marginal tax rates expected to be within the system from 2011. Using current income points, which may change by 2011, we see 11 different effective tax rates, including national insurance contributions: from an income of zero to £5,715 there is an effective tax rate of zero; from £5,715 to £6,420 there is an effective tax rate of 11.5 per cent.; from £6,421 to £6,745 it is 50.5 per cent.; and from £6,746 to £18,023 it is 70.5 per cent.. It then falls sharply to 31.5 per cent. for income between £18,024 and £43,875. It then goes back up, so for income between £43,876 and £50,000 it is 41.5 per cent. Between £50,001 and £58,170, it goes back up to 48.17 per cent., but, between £58,171 and £100,000, it goes back down again to 41.5 per cent. Between £100,001 and £112,950, it reaches its highest rate of all of 61.5 per cent. before going back down to 41.5 per cent. in the penultimate tax bracket of £112,951 to £150,000.

Mark Todd: Will the hon. Gentleman give way?

Greg Hands: I am first going to finish referring to the table, because it is important to have it on record so that we have a feel for how the figures will work and for the complexity of the system. The final rate, for those earning over £150,000, reverts to 51.5 per cent. That is a total rollercoaster ride and I will talk about some of its implications in due course.

Mark Todd: I admire the hon. Gentleman for his research. I am sure that he has a table for taxpayers who are over 65, from which he will be able to set out a similar set of figures.

Greg Hands: I do not wish to try your patience, Mr. Atkinson, but the same principle and degree of complexity are involved in that context too. For our purposes this morning, one table will suffice to illustrate the complications in, and the potential effect of, the 11 different marginal tax rates.
The issue gives rise to the absurd position that a taxpayer earning £105,000 has a marginal rate of 61.5 per cent. on additional income, while a taxpayer earning £155,000, which is 50 per cent. more, has a marginal rate of only 51.5 per cent. Furthermore, a taxpayer earning £125,000, which is somewhere in between those two figures, has a marginal rate of just 41.5 per cent. It makes absolutely no sense, and I would like a proper explanation from the Government of their work on the rates. We will now have 16 different personal tax rates, including those levied on trusts and dividend income, and the only people who will benefit from all of the complexity will be tax consultants. What are the Ministers thoughts on that?
In terms of practicalities, the issue also raises significant problems for the PAYE system with associated costs for both Her Majestys Revenue and Customs and for taxpayers who are in PAYE. The actual amount of the allowance depends on the level of income in the tax year, which will not be known until after the end of that year. The PAYE system cannot deal effectively with such situations, and will have to be based on estimates. In circumstances where an individuals usual income is well below £100,000, but they receive a one-off bonus taking it up to, for example, £120,000, the taxpayer will face a pretty much unprecedented underpayment of in excess of £2,590 at the end of the tax year, simply because PAYE will not be able to deal with the level of complexity associated with the 11 different marginal tax rates. In turn, that taxpayer expected PAYE to be collected at the right amount throughout the year and not at the end of it. Such a situation will throw certain fundamentals of the PAYE system into question and cause difficulties for individuals, HMRC and tax planners. The proposals do not sit comfortably with the PAYE system, which is not designed for that sort of complexity.

John Pugh: I am listening very carefully to the hon. Gentleman, but some of the problems that he mentions are intrinsic to the system itself and are not dependent on the proposal under discussion, are they not? He illustrates a series of problems that will occur, but they would occur in any system in which allowances are reduced. Do all of the problems derive from the simple fact that there are 11 different bands?

Greg Hands: The system that the Government propose and the phasing out of the allowance above £100,000 will add immensely to that complexity. The hon. Gentleman is right to say that there is already a certain amount of complexity, but the amount of complexity added by the proposals is entirely disproportionate to that which already exists.
Those with income subject to PAYE in and around some of the bands will be subject to estimated PAYE codes, which will in many cases lead to under or over-payments of tax and in-year requests for change and coding notices, which will put further strain on the tax administrative system. The result will be an increase in the need for form-filling, the issue and processing of which, together with making the associated payments, repayments or coding adjustments, will increase the administrative burden and costs for many taxpayers and HMRC.

Peter Bone: Perhaps I should declare an interest as a fellow of the Institute of Chartered Accountants in England and Wales, as clearly this could be welcomed as a job creation scheme for accountants. I was not aware of those facts, and my hon. Friend has helpfully brought them to the Committees attention, but is it not just a stealth tax whereby taxation on higher earners is increased without actually saying that that is what it is? Are the Govt not trying to do that by the back door?

Greg Hands: My hon. Friend is absolutely right. It is a more stealthy way of raising yet more revenue from higher earners. I do not wish to trespass on the major debate we are to have on clause 6, but I think that he is quite right. He is also right that that will act as a boon and incentive to many in the tax planning industry for additional bands that should not be there.
I will introduce two sets of comments from observers on the associated payments, repayments and coding adjustments. The second is actually from the Institute of Chartered Accountants but the first is from the Chartered Institute of Taxation, which, with regard to these proposals, states:
We consider that a more appropriate method would have been to lower the threshold at which the 50% band is introduced or to set a rate between 40% and 50% for the band of income between £100,000 and £150,000.
I am not in a position to endorse that, but I would be interested to hear the Ministers response to the proposal. The CIT went on to state:
HMRC/HM Treasury (HMT) models could predict the level at which these would need to be set to yield the same revenue as the current proposals, yet with reduced administrative burdens for HMRC, tax agents and tax payers.
What consideration has the Minister given to those suggestions?
The ICAEW made more or less the same point:
A more straightforward option would be for personal allowances to be given in full, but for the rate of tax applying to be higher over, say, £100,000 of taxable income. This would have the benefit that PAYE would then be able to deal effectively with bonuses etc so that underpayments of tax would be less likely. Analysis will need to be done to identify an appropriate rate of tax and there will be winners and losers.
What consideration has the Minister given to that proposal? He has explained the rationale in terms of his belief that those who have been and are earning more should be paying more, but can he explain the rationale behind the plethora of new marginal tax rates that he is creating? That seems to breach the principle that everyone is entitled to receive a certain amount of income on which they pay no tax, but it also seems to breach the undertaking that the Minister gave personally, along with the Government, not to make our tax code too complicated. That cumbersome and complicated schedule of marginal tax rates will surely lead to gross distortions in the system, so I would be grateful to hear what studies have been done of that change with people outside.

David Gauke: My hon. Friend will recall the 2007 Budget, in which the then Chancellor, the current Prime Minister, proudly announced that for the first time the UK would have only two rates of tax on personal income, combining national insurance and income tax, and a simplification process, having abolished the 10p rate. Now we seem to have more bands than ever.

Greg Hands: My hon. Friend is, of course, quite right. That is yet another example of the Governments economic and tax policy unwinding disastrously over the past two years with the former Chancellor, now as Prime Minister, continuing patterns of disastrous stewardship of the finances.
My other question is about what behavioural changes there will be. What behavioural changes does the Minister predict will happen on the overall tax take from those changes? At the moment, they seem to be predicated entirely on no behavioural change, which was the point made by the hon. Member for South Derbyshire in his intervention. How does the Minister feel about jeopardising our long-treasured, progressive system of taxation, where bands go up the more that one earns, and introducing this rollercoaster? What impact will that have on the message that the Government are sending out to the people of this country?

Peter Bone: It is a great pleasure to serve under your chairmanship, Mr. Atkinson. We are seeing a clear change in Government policy here. The stealth tax is still presentthey are trying to get it through the back door. It is an attempt to tax higher earners, going away from the Tony Blair philosophy that swept Labour into power. Now the Government believe in tax-and-spend, while the Conservatives believe in lower taxation and responsible spending. That is good for the election that is on the horizon.
I remember last year, in every debate, whoever was Chancellor stood up and said, We believe in making a simple tax system. We want to remove complications and have as few rates as possible. What we now have is a complete and utter reversal, which I think is a mistake. Honesty would have been the better policynot fiddling with personal allowances but simply putting the tax rate up on higher earners, if that was what the Government believed was right. Then we can have a proper debate. The days of stealth taxes should be over.

John Pugh: I have a few brief comments. Regarding the points made by the Government about complexity, hon. Members will recall that the Liberal Democrats proposal was targeted at those people earning £100,000 and more. It was abandoned at a celebrated occasion at a party conference, when we made what was called the green tax switch. The Government have a different way of doing itthey have a less severe redistribution in their proposal than in ours. The reasons why the Lib Dems modified their position are the very issues that I would like the Minister to address now.
It has been suggested that if we introduce such a proposal, people who are in the unfortunate category of earning £100,000, looking with envy at the people who earn £98,000, will simply find a way to take their reward via other means such as capital gains. It was also argued, when we changed our position apropos the higher tax band, that some of the gains in redistribution would ultimately be somewhat spurious. Some of the reductions in social inequity that would follow were probably more imagined than real. Will the Minister familiarise me with his thinking about those proposals in terms of their effects on tax avoidance and people taking their reward in different ways? The Minister may well acknowledge a genuine redistribution urge here, but what does he think the proposals will do to low incomes?

Stephen Timms: I do not agree with Opposition Members characterisation of the measure. Regarding complexity, as I said in my earlier remarks, the threshold for income tax and national insurance will, under the proposals that I have set out, including some of those in the Bill, be fully aligned for individuals for the first time. Some of the steps in the table read out by the hon. Member for Hammersmith and Fulham will be removed. The only parts of his table that are affected by the measure that we are discussing now are right at the top end of the income range. As I have underlined, only 2 per cent. of peoplethose on the highest incomeswill be affected. The full allowance will still be available for 98 per cent. of taxpayers. The 2 per cent. whom we are talking about are already required to complete self-assessment forms. Hence, there will be no additional form-filling for themit will all be done through the form that they already have to complete.

Greg Hands: Surely the Minister must realise that anybody who is likely to be earning between £100,000and £112,950 is likely to change their behaviour as a result of these changes. At the weekend, in The Sunday Times there was an article entitled Five ways to turn income into capital gains. That is precisely the sort of thing that I think will lead to behavioural change, which he claims will be avoided.

Stephen Timms: I will come on to the question of behavioural change in a moment. The hon. Gentlemans charge was that people would have to fill in more forms and I am simply pointing out to him that that is not the case. They already complete a self-assessment form. That is all that is required for the calculation to be successfully completed, so there will not be any more forms for them to fill in.

Greg Hands: Surely there will be more forms to be filled in if a mistake has been made, which is quite likely to happen. People will have to resubmit their tax returns, on the basis that mistakes are far more likely with this very complicated structure.

Stephen Timms: There is no basis for that assertion at all. People will complete their self-assessment form in the way that they do now. They will state their income and the calculation will be made. There is no reason at all why this change will alter the accuracy with which people complete their forms.
There is a clear case on fairness grounds for this change, which I touched on in my earlier remarks. At the moment, a taxpayer gets relief from their personal allowance at the highest rate of tax that they pay. That means that a basic rate taxpayer gets the benefit of £1,295 and a higher-rate taxpayer gets the benefit of twice that sum, which is £2,590. It is entirely right, at a time when all of us acknowledge that fiscal consolidation is required, that people at the high end of the income range should contribute somewhat more.

Mark Todd: I entirely accept my right hon. Friends argument about fairness. However, I must admit that I have been puzzled about the mechanisms that have been chosen, which are likely to incentivise behavioural change in a group of people who are well able to pay for advice to maximise the benefit of that change. What calculation has the Treasury done on the net revenue that will be lost as a result of this proposal from people simply altering their behaviour, such as topping upadmittedly, only temporarilytheir pensions, putting money into venture capital trusts, or using a variety of mechanisms that would achieve the outcome that they desire?

Stephen Timms: First, an assessment has been made and the figures in the Red Book take account of anticipated behavioural changes. I noticed that the Institute for Fiscal Studies described those assumptions as being not unreasonable; they are sensible assessments of the kind of changes that will be required.
However, I would caution my hon. Friend on one point. Sometimes there is a suggestion in these discussions that, in reality, we cannot increase the tax paid by people on high incomes. That is not the point that he made, but it is sometimes suggested that, if there is to be fiscal consolidation, the practical reality is that the additional contributions have to come from those on lower incomes. That is not his position, or my position, but I think that it is very important that we resist that view and that we proceed with measures such as this one, which require, as I have already set out, an additional contribution in tax from the 2 per cent. of highest earners in the country.

Greg Hands: The Minister is being generous in giving way. He can correct me if I am wrong, but I do not think that I have seen anywhere an assessment of the phasing-out of the allowances. I am sure that he is right that there have been assessments. I think that the issue was debated by the Treasury Committee, to assess the impact on behavioural changes caused by the 50p tax rate. However, I do not think that I have seen anywhere in the Red Book an assessment of the changes to the phasing-out of the allowances. Therefore, if such an assessment is in the Red Book, can he tell us what the numbers are?

Stephen Timms: Yes. The assessment was done for both measures together, rather than for each measure separately. So the figures apply to both measures.

Greg Hands: Surely the Minister must realise that there are two very separate issues here. They are the 50p tax rate for those earning more than £150,000 and the changes in the allowances, which will make behaviour very susceptible to these very small changes in income. For example, people may get a bonus towards the end of the year. which might take them from £95,000 to £115,000. But the behavioural change there will be very different from that of someone who is currently on £250,000 and considering whether to leave the country. Those are two different things and I should be grateful to hear what separation he has made of those two considerations.

Stephen Timms: The hon. Gentleman is right, of course. There are different issues and there will be a number of kinds of behaviour. There has been talk of people going for capital gains. There will be a variety of different behavioural responses that people will perfectly appropriately pursue. My point was that the figures, such as those discussed in the Treasury Committee, relate to that variety as a whole. That is the basis on which the assessment has been made. I have no doubt that the individual steps were looked at when that assessment was put together, but the figures that have been set out relate to the measures as a whole.

John Pugh: Is the Minister ablenot necessarily nowto tell us what the fiscal benefits of this measure are and what they would have been if anticipated behavioural change had not been read into that? What benefit will this achieve for the Treasury and what allowance is being made for peoples behavioural change?

Stephen Timms: As we heard, this was discussed at the Treasury Committee. If one looks at the theoretical take from the measures in the clause, the scorecard revenue that we expect to receive is 36 per cent. of that total theoretical revenue. That has been fully taken into account in the Red Book.
I understand the point about a high marginal rate over a portion of income, but the measure that the clause set outs is the right way to seek a contribution to consolidation from this group of taxpayers. It is relatively straightforward to implement. It ensures that taxpayers with incomes in this income bracket pay a maximum of £2,590 towards fiscal consolidation and it minimises the behavioural impact too. As I said earlier, the taper will operate on exactly the same principles as the familiar taper for age-related allowances. All those affected will be within the self-assessment regimes already. I do not agree that having another rate for income tax between 40 and 50 per cent. would have been better. Doing this through the personal allowance tapering and using a mechanism that is already familiar in the tax system is the appropriate way to go.
Fiscal consolidation is always difficult. Those who are asked to contribute more in the future than in the past will, understandably, have some regrets. But those whose income is at the highest end of the income spectrum have seen their incomes rise the fastest over the past decade. So it is absolutely fair to ask them to contribute rather more.

David Gauke: The Minister makes the point that people who lose out because of, to use a phrase he has used a number of times this morning, fiscal consolidation, will feel aggrieved. But does he not agree that they will feel particularly aggrieved if a tax rise is contrary to an express commitment in a manifesto?

Stephen Timms: In a period in which we are seeing an utterly unprecedented crisis in the world economy, I think that people are looking to the Government to take the right decisions and safeguard the economy, families and businesses. The situation that we are in at the moment is unprecedented and requires very bold measures on the part of the Government. We have put bold measures in place and this is one of them. People will recognise that that is the right thing to do.

Question put and agreed to.

Clause 4 accordingly ordered to stand part of the Bill.

Clause 5

Abolition of personal reliefs for non-residents

Peter Atkinson: Clause 5 is a one-line clause that introduces schedule 1. Both clause and schedule relate to the abolition of personal reliefs for non-residents. It might be more convenient for the Committee to have a general debate as if those two things were being considered together under clause 5, as long as that does not cause any problems.

Question proposed, That the clause stand part of the Bill.

Stephen Timms: As you said, Mr. Atkinson, clause 5 introduces schedule 1. It achieves a more consistent treatment in the provision of personal allowances and reliefs from income tax for all non-UK residents and non-European economic area citizens, thereby ensuring that the legislation complies with the Human Rights Act 1998.
The clause removes entitlement to personal allowances and reliefs from those who currently enjoy them solely on the grounds of Commonwealth citizenship. I am confident that the large majority of non-resident Commonwealth citizens who currently claim UK personal allowances and reliefs will still be entitled to do so through other provisions. Those will include double taxation agreements that allow non-resident, non-EEA citizens to claim UK personal allowances and reliefs. Among other things, the agreements provide for Commonwealth citizens who have become or served as members of the British armed forces, to get that entitlement.
The opening paragraph of schedule 1 removes most of the personal allowances and reliefs in question. Those include personal allowances, married couples allowance, blind persons allowance and life assurance premiums. Having mentioned blind persons allowances, I should point out that it is unlikely that anyone would be affected by that change, as the current rules for eligibility for that allowance are already predicated on a person living in the UK.
Paragraphs 2 and 3 provide for a number of consequential amendments in relation to life assurance premiums and limits on relief for those premiums. That has the effect of removing entitlement from non-resident individuals who currently claim them solely by virtue of being Commonwealth citizens. The remaining paragraphs make the consequential changes necessary to ensure consistency through all the relevant tax legislation on this matter.
The result of the changes taken together is that non-UK-resident Commonwealth citizens will no longer qualify for personal allowances and reliefs by reference to their citizenship status alone. It does not affect their entitlement to personal allowances and reliefs under other qualifying conditions or double taxation agreements. The amendments in the schedule will take effect in the tax year 2010-11 and subsequent tax years. I commend the clause and schedule to the Committee.

Greg Hands: I thank the Minister for his explanation of what at first does not appear to be a particularly controversial provision. However, there is a lot of controversy embedded in this, and there are a large number of people to whom this country owes something of an obligation who are likely to be affected. I would be grateful to hear what estimate the Minister has of the number of persons likely to be affected.
As the Minister said, this will principally affect 14 different Commonwealth countries with which the UK does not currently have a dual taxation treaty. I understand those 14 countries to be the Bahamas, Cameroon, the Cook Islands, Dominica, the Maldives, Mozambique, Nauru, Niuea country of which I have not heard, for which I must apologise to the citizens of NiueSaint Lucia, Saint Vincent and the Grenadines, Samoa, Tanzania, Tonga and Vanuatu.

Bob Blizzard: The hon. Gentleman obviously had no constituents affected by the phone scams of a few years agoconstituents were getting huge bills from BT, running up to hundreds of pounds, for mysterious phone calls made to Nauru. Unfortunately, BT never recompensed those people.

Greg Hands: I thank the hon. Gentleman for his telling and knowledgeable intervention. He is rightI had a constituency case of someone running up such bills on a phone line to Vanuatu, rather than Nauru.
Some of the 14 countries involved are pretty mainstream, larger countries, such as Tanzania, Cameroon and the Bahamas. A certain number of residents of those countries will have previously worked in the UK, which I shall come on to in due course, but I would suggest a fair few of my constituents would be among themsome of the Ministers constituents may also be affected. It is worth pointing out that the countries that we talked about cover a pretty vast range of likely income areas, ranging from the BahamasI am not for one moment suggesting that the Bahamas is entirely full of wealthy people seeking to avoid tax, but on a per capita basis it is doing rather wellto Tanzania and Cameroon, which are very much developing countries.
I want to raise a few of the points made by the Low Incomes Tax Reform Group in reference to clause 5. The group is concerned that people who have served the United Kingdom in the past, returned to their home countries and become pensioners will suddenly find themselves liable to UK taxation perhaps for the first time since they were in the UK. It goes on to mention the Ministry of Defence, recruiting for the military, and the NHS, for nurses:
Non-resident individuals will no longer qualify for reliefs and allowances including the basic and age-related personal allowances, married couples allowance, blind persons allowance and relief for life assurance solely by virtue of being a Commonwealth citizen. These allowances are particularly relevant for pensioners.
For the Government to introduce a penalising measure seems slightly bizarre. For example, many from the SS Windrush generation, came over and served in this country in public service in the 1950s and 60s, and will have now returned to islands such as St. Lucia, St. Vincent and the Grenadines. I would be grateful to know whether the Minister has considered that and whether he has had any discussions with either of the Governments involved or, for example, with any of the SS Windrush support groups that are still around in this country. Going back to the LITRG:
It does seem perverse that a supposed action in the name of Human Rights brings a range of low income pensioners in some of the poorest countries of the world into the ' UK tax net out of the blue.
I have a few questions for the Minister. Most obviously, why is he introducing the set of measures now? What specific proposals does he have to negotiate double taxation treaties with the 14 countries that are not covered but which are affected? What discussions has he had with the Governments of the 14 countries? What are his feelings about creating two classes of Commonwealth citizen? Our relations with the Commonwealth are important, but the measure will suddenly create two different classes of Commonwealth citizens. How many people in each of the 14 countries will be affected and what study has he done of the type of people who will be affected? Is the reason why he changed the rules really that the old rules were not compliant with the Human Rights Act, which was what was implied in the guidance notes? Finally, how much will all those measures actually raise? The Minister needs to be ready to answer a large number of questions for the benefit of the Committee.

The Chairman adjourned the Committee without Question put (Standing Order No. 88).

Adjourned till this day at half-past Four oclock.